Direct Digital Holdings, Inc. (NASDAQ:DRCT) Q4 2022 Earnings Call Transcript

Direct Digital Holdings, Inc. (NASDAQ:DRCT) Q4 2022 Earnings Call Transcript March 23, 2023

Operator: Greetings and welcome to the Direct Digital Holdings’ Fourth Quarter and Full-Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brett Milotte, Senior Vice President, Investor Relations, ICR.

Brett Milotte: Good afternoon, everyone, and welcome to Direct Digital Holdings fourth quarter and FY2022 earnings conference call. My name is Brett Milotte, and I’m representing Direct Digital Holdings from ICR. On today’s call are Direct Digital Holdings’ Chairman and Chief Executive Officer, Mark Walker; and Chief Financial Officer, Susan Echard. Information discussed today is qualified in its entirety from its Form 8-K and accompanying earnings release, which have been filed today by Direct Digital Holdings, which may be accessed through the SEC’s website and DRCT’s website. Today’s call is also being webcast and a replay will be posted to DRCT’s Investor Relations website. Immediately following the speakers’ presentation, there will be a question-and-answer session.

Please note that statements made during the call including financial projections or other statements that are not historical in nature, may constitute forward-looking statements. These statements are made on basis of DRCT’s views and assumptions regarding future events and business performance at the time they are made. We do not undertake any obligation to update these statements. Forward-looking statements are subject to risks which could cause DRCT’s actual results to differ from its historical results and forecasts, including those risks set forth in DRCT’s filings with the SEC. You should refer to and carefully consider these for more information. This cautionary statement applies to all forward-looking statements made during this call.

Do not place undue reliance on any forward-looking statements. During this call, DRCT will be referring to non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on the earnings release of DRCT filed in Form 8-K today. I will now hand over the conference call to Mark Walker, Chief Executive Officer. Mark?

Mark Walker: Thanks, Brett, and good afternoon, everyone. This is our first Q4 full-year earnings call as a public company, and I’m incredibly proud to report strong results for both the quarter and the year. Our first year as a public company demonstrated Direct Digital Holdings operational excellence, expansion and market share growth, which garnered robust financial performance. Before we get into more detail about the full-year, I’d like to begin with a quick summary of our fourth quarter. In Q4 2022, our revenue increased to $29.4 million, an increase of $16.5 million or 128% over the $12.9 million in the same period of 2021, and adjusted EBITDA was flat at $1.8 million. Our supply side platform continues to increase publisher partner engagements in addition to increasing in our impression inventory.

In the fourth quarter, our sell-side advertising segment processed approximately 132 billion monthly impressions, an increase of 81% over the same period of 2021 with over 833 billion bid requests for the quarter. In addition, the company’s sell-side advertising platforms received over 17 billion bid responses in the fourth quarter of 2022, an increase of over 25% over the same period in 2021 through 170,000 buyers for the quarter, which is a 109% increase over the same period of 2021. On the buy-side, these businesses served approximately 218 customers, an increase of 7% compared to the same period of 2021. While Q4 is historically our strongest quarter, this year we began our process to expand our overall capacity, scale and performance to fuel growth for 2023 and 2024.

We achieved these results while we began our transition to HPE GreenLake environment will allow us to continue expanding our growth for the next few years. Looking at the full-year of 2022 was a volatile year in the ad-tech space, primarily driven by supply chain disruptions and larger economic issues also had a negative impact on the industry’s operating environment. Open marketplace CPMs are platform strategy directly benefited as difficulty as the middle market businesses moved to look for alternatives due to being less expensive, less restrictive, and more accessible with expansive reach. In spite of these macroeconomic issues and changes, our company was able to achieve total full-year revenue of $88 million in line with our previously issued guidance an increase of $49.9 million or 131% growth over $38.1 million achieved in 2021.

We also achieved adjusted EBITDA of $8.8 million or 38% higher than the $6.4 million adjusted EBITDA for the same period in 2021. On the corporate side, we had a number of achievements, a few, which I wanted to highlight today. First, as mentioned before, we successfully completed our IPO and raised $15 million of capital upon completion. Second, we raised an additional $3.9 million of non-dilutive capital to retire the USDM preferred equity position. On the organizational side, we added three new independent directors for our Board of Directors, adding technology and industry depth as our advisors, and we successfully constructed a shared services operation to capture cost synergies across all of the Direct Digital Holdings subsidiary companies.

And finally, we re-platformed and transitioned Colossus SSP via groundbreaking partnership with HPE GreenLake. We firmly believe that our market-leading performance in 2022 was driven by three key strategic objectives: our technology efficiency, our processes, and our people. Our technology configuration has allowed us to spend both financial and resource investments effectively. Consequently, we internally call our strategy smart innovation where we build, borrow, or buy technology with the end use cases in line and we are directly focused on driving ROI for both our clients and partners. If we can’t see a tangible outcome that is metric-driven, we do not invest. We believe that has been one of the main contributors to our profitability and outpaced results that we have experienced since we have been public.

Direct Digital Holdings values the neglected and nascent publishers that have not been added to the advertising ecosystem. This has allowed us to deliver performance that is historically rare. Additionally, with our approach on the buy-side and sell-side of the businesses, we have been hyper-focused on delivering ROI and performance to our clients and partners. Instead of clients’ spending money with our company and not delivering a return, we are always driving for results for them. By being positioned in these nascent markets with our buy-side platform focus on the middle market and our sell-side platform focus on both the general and multicultural publishers, our team is in a strong position to capture market share that has historically been ignored.

Within the United States, the multicultural audience represents 40% of the U.S. population. However, according to the Association of National Advertisers, marketers historically are only allocating 5% of their marketing spend to reach those audiences. If companies want to grow in the United States, they will have to reach those markets through those publishers and therefore, we believe the overall trend of this spend dislocation can work in our favor and we are looking to continue to see that growth for the foreseeable future. Regarding our team members, our employees come from corporate America, consulting in other leading ad-tech firms. We hire experts who have diverse views, perspectives and backgrounds, but who are also highly experienced in their craft.

We believe that our diversity is our secret sauce and you will not find a company in this field that is more diverse across all levels of the organization. From our Board of Directors, to our leadership team, to our staff, our company’s diverse environments bring the best solutions and subsequently positive results. We plan to continue to preserve and promote a diverse culture to deliver positive results for our clients’, partners, and our shareholders. Turning to strategic growth for a moment. We have a history of making strategic acquisitions that we believe in the current marketplace with over 80 plus SSPs in the programmatic ecosystem. There is certainly an opportunity to explore and evaluate strategic growth opportunity. However, we want to make clear that any such opportunities must be strategic, opportunistic and accretive to our company.

As a company, our primary focus for 2023 is to continue our strong growth trajectory and deliver $118 million to $122 million in topline revenue along with strong profitability. In addition to our organizational focus, we believe the current market dynamics are favorable for Direct Digital Holdings because of a few macro trends. With the current increase in media spend being targeted to reach growth, multicultural audiences and middle market companies moving dollars away from traditional media spend in digital, our proven operational model combined with our stable capitalization and liquidity structure has strategically positioned our company to continue its growth trajectory. I will now hand things over to Susan Echard, who is going to walk you through some of the financial highlights in further detail.

Susan?

Susan Echard: Thank you, Mark. Before I dive into our financial results, I wanted to quickly make a correction to the full-year earnings per share number we released this morning in our earnings press release. Full-year 2022 earnings per share should have read $0.23 instead of the $0.17, and we have consequently put out a corrected press release. Turning to topline revenue. Our revenue increased to $29.4 million in the fourth quarter of 2022, an increase of $16.5 million or 128% over the $12.9 million in the same period of 2021. We finished the year with total revenue of $88 million, which was in line with our guidance, an increase of $49.9 million or 131% growth over the $38.1 million achieved in 2021. Our sell-side advertising segment ended the year with a strong fourth quarter and drove the majority of this increase.

Colossus SSP grew to $22.3 million for Q4 and contributed $15.6 million of the increase, or 231% over the $6.7 million in the same period of 2021. For the full-year, our sell-side segment achieved $58.7 million in revenue, an increase of $46.7 million or 389% growth over the $12 million in 2021. For the fourth quarter, our buy-side businesses, Orange 142 and Huddled Masses grew 15% year-over-year and contributed $0.9 million of our increase, finishing the quarter with $7.1 million in revenue compared to $6.2 million in the same period of 2021. For the full-year, our buy-side segment grew to $29.3 million, an increase of $3.2 million or 12% over the $26.1 million in 2021. For the fourth quarter of 2022, gross profit dollars were $7.4 million compared to $5 million for the fourth quarter of 2021, an increase of $2.4 million as a result of higher revenue.

Gross margins for the fourth quarter of 2022 was approximately 25% compared to 39% in the same period of 2021. Gross profit dollars for the year were $28 million compared to $18.4 million for 2021, an increase of $9.6 million as a result of higher revenue. Gross margin for 2022 was approximately 32% compared to approximately 48% for 2021. These margin results are in line with our margin expectations given the rate of accelerated growth in our sell-side advertising segment. Our sell-side segment whose revenues grew as a percentage of our overall revenue has a lower gross margin than our buy-side segment. The buy-side advertising segment gross margins were 61% for the fourth quarter of 2022 compared to 60% in the fourth quarter of 2021. The sell-side advertising segment gross margins were 14% for the fourth quarter of 2022 compared to 19% in the fourth quarter of 2021.

For the entire year of 2022, the buy-side advertising segment gross margins were 64% compared to 62% in 2021. And for 2022, the sell-side advertising segment gross margins were 15% compared to 18% in 2021. As the sell-side business segment continues to grow, the slight reduction in the margins are due to the continued investment in our technology and our overall mix of publishers. With respect to the operating leverage of the SSP programmatic business, the higher revenue does result in higher dollar EBITDA contribution by the sell-side segment. Operating expenses increased to $6.3 million in the fourth quarter of 2022 or an increase of $2.6 million over the $3.7 million of expenses in the fourth quarter of 2021. For the full-year 2022, operating expenses were $21.3 million compared to $14 million in 2021 or an increase of $7.3 million.

In 2021, Direct Digital Holdings was a private company. As a result of our IPO in February of 2022, the company has increased its headcount in the shared services area and incurred higher costs related to being a public company, primarily in the professional services and investor relations activities, which in total, we estimate these to be approximately $3 million over the course of our first year. With our organic revenue growth, we have also added strategic headcount in our sales and operational personnel. Operating income was $1.2 million for the fourth quarter of 2022 compared to operating income of $1.3 million in the same period of 2021. For the full-year, operating income increased $2.3 million or 52% to $6.7 million for 2022 compared to an operating income of $4.4 million for 2021.

Looking at our organic growth of our three subsidiaries in 2022, the operating income for the combined buy-side and sell-side advertising segments was $14 million, a 102% increase or $7.1 million compared to the $6.9 million for 2021. Net income for the fourth quarter was $0.2 million compared to a loss of $2.1 million in the same period of 2021. For the year, net income was $2.9 million in 2022 compared to a loss of $1.5 million in 2021. For the fourth quarter, adjusted EBITDA was flat at $1.8 million in the fourth quarter of 2022 and 2021 and for the full-year, adjusted EBITDA grew to $8.8 million or 39% higher than the $6.4 million adjusted EBITDA for the same period in 2021 not withstanding the additional public costs mentioned earlier.

Regarding earnings per share, while we did have some investments in both our operations and personnel in Q4 impacting our EPS, we want to remind everyone that Direct Digital Holdings is a high growth first-year public company in the ad-tech space. As the analysts on this call know management focuses on two metrics to judge our performance, topline revenue and adjusted EBITDA, both of which showed strong results this quarter. Turning to the balance sheet. We ended the year with cash and cash equivalents of $4 million, a slight decrease from the $4.7 million as of 12/31/2021. Total cash plus our accounts receivable balance as of year-end was $29.1 million compared to $12.6 million at the end of 2021. We continued to invest in Colossus SSP technology and during the quarter, we acquired the license from our third-party developer for $500,000 and invested in the transition of our servers to HPE GreenLake as well as additional software to further mitigate IVT.

As previously disclosed in our Form 8-K filing with the SEC on January 9, 2023, we did enter into a Loan and Security Agreement with Silicon Valley Bank, which provided for a revolving credit facility. We had not yet drawn any amounts under this credit facility. And as disclosed in our Form 8-K filing on March 13, we have issued a notice of termination of the loan agreement and we are in the process of terminating the credit facility. We have received a consent to terminate the credit facility and a waiver of the terms relating to the credit facility under our term loan and security agreement with Lafayette Square Loan Servicing. Based on our expectations of cash flows from operations and the available cash held, we do believe that we will have sufficient cash resources to finance our operations and service any debt obligations until at least the end of fiscal year 2023.

Now to touch on our guidance. Our guidance assumes that the U.S. economy does not have any major economic conditions to deteriorate or otherwise significantly reduce advertiser demand. We plan to offer annual guidance and update it throughout the year and accordingly, we estimate that for the fiscal year 2023, we expect revenue to be in the range of $118 million to $122 million or 36% growth year-over-year at the midpoint. As we enter into our second year as a public company, we remain disciplined in our strategic organic growth initiatives as well as a continued focus on delivering strong EBITDA and providing maximum value for our shareholders. Now I’d like to turn it back over to Mark for some closing comments.

Mark Walker: Thank you, Susan, and thank you to everyone for joining. We sincerely appreciate your interest in Direct Digital Holdings and the exciting business and opportunity we are building here. We are now going to open the line for some questions.

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Q&A Session

Operator: And our first question comes from the line of Dan Kurnos with The Benchmark Company. Please proceed.

Daniel Kurnos: Great. Thanks. Solid finish to the year guys in an obviously uneven environment. I guess, Mark, there’s a lot of noise out there, so I’ll ask the boring questions first. You gave some color in your prepared remarks around mix away from walled gardens and clearly you guys play in a more performance oriented space, benefiting as well from diversity initiatives. We saw some positive trends there especially like GroupM even. What kind of gives you the confidence in the growth outlook this year and can you give us kind of your view on mix growth in buy-side versus sell-side?

Mark Walker: Yes. Good question and good to hear from you Dan. What we’ve been looking at is, pretty much the overall market and where we €“ where we have been really kind of carved our niche. And that’s in regards to the buy-side, it’s in the mid-market. And as you know, we’re in nascent markets that are your Tier 2, Tier 3 media markets. And we work primarily with DMOs or Destination Marketing Organizations and then we work with Tier 2 agencies as well as with direct brands. As it relates to the buy-side business, based upon what we saw at the last half of the year versus what we’re starting to see at the beginning of this year, we feel like the momentum that we have captured on the buy-side business is still there for at least the first half of this year as well as in what we have seen in regards to the contracted business that we have, the contract business that we have as well as the IO or Insertion Order business that we’ve seen.

Based upon what we have seen in those marketplaces, we have seen that even in this recessionary period, if you will, that the market seems to be stable and holding strong with the middle market as it relates to our buy-side business. When we talk about our sell-side business, we are focused on the multicultural space as well as the general market and some of the components that we have put in place even if there is somewhat of a level of a downturn, when you do think about the Fortune 500 companies and pullback and marketing spend. The amount of greenfield space that we actually are able to grow in adding new publishers as well as DSPs, we feel like we’ll be able to overcome any recessionary issues that we might experience in 2023, and those are some of the contingencies we’ve put in place.

In addition to that, we have been specifically in Q4 started the process of re-platforming our Colossus SSP to allow us to really build up that infrastructure that we need to maintain the growth that we are anticipating throughout 2023 as it relates to the addition of new publishers and DSPs working inside of our ecosystem. So those are the pieces that we have in place to help us carry on the growth in the momentum that we experienced in 2022 throughout the 2023 year, and that’s how we were getting comfortable with giving the guidance that we have provided.

Daniel Kurnos: Got it. That’s super helpful. And I know you gave a revenue guide, but at least maybe at a high level, can you give us a sense on how you think margins are able to trend throughout this year and maybe some of the puts and takes on investment?

Mark Walker: Yes. Absolutely. So just to give, we will not be giving EBITDA guidance or EBITDA margin guidance for 2023. What I will tell you is we are, as you know, when we built this company, we have been a self-funded organization and we have been very judicious in the capital that we receive, but we also believe maintaining some level of profitability is very important to give us organizational discipline. But what we are also planning for is a level of investments in platform and in salesforce and in people for 2023 to really position us for 2024 in the growth that we’re anticipating two years out. With that being stated, what we will say is we are planning and managing to profitability. But we will not be giving EBITDA guidance or EBITDA margin projections as to what that will look like.